FAAA urges Govt to pursue recalcitrant directors on CSLR

The Government could help alleviate pressure on the Compensation Scheme of Last Resort (CSLR) by running a fund to pursue recoveries from failed firms and directors and executives, according to the Financial Advice Association of Australia (FAAA).

The FAAA has responded to Treasury’s consultation around CSLR Special Levy by arguing that notwithstanding claimed legislative impediments, there exist sensible opportunities for the Government to contribute to the cost of the scheme and to reduce the scale of future special levies by funding such a fund.

It said that historically advisers have “too often observed no effective action being taken against firms (including their directors and executives) that have been put in liquidation, despite there appearing to be conduct that was designed to deprive creditors of the full value of the assets of the entity”.

“The very existence of the CSLR is a disincentive for such action to be taken, as consumers can recover up to $150,000 without the costs and risks of taking court action,” the submission said.

“The CSLR operator’s actuaries revised estimate for the 2025/26 year includes an estimate of just $34,000 in recoveries. This is a disturbingly low number in the face of apparent misconduct undertaken by these entities to avoid payments to creditors.

“We propose that the Government fund a body to pursue recovery of money from firms where claims have been made against the CSLR. The establishment of such a fund, and the active pursuit of such entities, will not only serve as a deterrent to people seeking to undertake this insolvency related misconduct, it will also be important to all stakeholders to know that people are not going to be allowed to get away with this misconduct – that every effort will be undertaken to ensure that those responsible will be pursued to the limits of their resources before innocent parties are asked to pay compensation,” the FAAA said.

“This is an essential reform. It is necessary that the Government funds this, as the CSLR has insufficient rights of subrogation, as well as a strong disincentive to pursue these matters, which involve risk, when needed funds can be raised risk-free from innocent advisers. For any matter where the amount of the recovery exceeded the cost of pursuit of the case, this money would be transferred to the CSLR and would have the effect of reducing future levies required,” the submission said.

The FAAA argued that, as well, the Government should temporarily fund the CSLR to provide monies for consumer claims in years where the receipt of levies is delayed.

“This year, it is evident that the CSLR will soon run out of money, due to a delay in the issue of invoices for the standard levies and due to an inevitable delay in the issue of a special levy. This is disadvantageous to claimants and damaging to the reputation of the scheme. The Government should provide an interest free loan to the scheme at the start of the year to cover the cost of claims until the levies have been received.”